10-Q 1 form10q.htm UNIVERSAL FOREST PRODUCTS, INC 10-Q 9-27-2014

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 27, 2014

OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-22684
 
UNIVERSAL FOREST PRODUCTS, INC.
(Exact name of registrant as specified in its charter)

Michigan
 
38-1465835
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
     
2801 East Beltline NE, Grand Rapids, Michigan
 
49525
(Address of principal executive offices)
 
(Zip Code)

Registrant's telephone number, including area code (616) 364-6161

NONE
(Former name or former address, if changed since last report.)

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
 
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large Accelerated Filer x
Accelerated Filer o
Non-Accelerated Filer o
Smaller reporting company o

Indicate by checkmark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).  Yes o   No x
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

Class
 
Outstanding as of September 27, 2014
Common stock, no par value
 
19,974,886


UNIVERSAL FOREST PRODUCTS, INC.
 
TABLE OF CONTENTS
 
PART I.
FINANCIAL INFORMATION.
Page No.
       
 
Item 1.
Financial Statements.
 
       
    3
       
    4
       
    5
       
    6
       
   
       
 
Item 2.
15 
       
 
Item 3.
28
       
 
Item 4.
28
       
PART II.
OTHER INFORMATION.
 
       
 
Item 1.
Legal Proceedings – NONE.
 
       
 
Item 1A.
29
       
 
Item 2.
29
       
 
Item 3.
Defaults upon Senior Securities – NONE.
 
       
 
Item 4.
Mine Safety Disclosures – NONE.
 
       
 
Item 5.
29
       
 
Item 6.
30
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)

(in thousands, except share data)
           
             
   
September 27,
2014
   
December 28,
2013
   
September 28,
2013
 
ASSETS
           
CURRENT ASSETS:
           
Cash and cash equivalents
 
$
26,184
   
$
-
   
$
5,151
 
Restricted cash
   
720
     
720
     
720
 
Accounts receivable, net
   
257,235
     
180,452
     
241,990
 
Inventories:
                       
Raw materials
   
150,585
     
161,226
     
127,854
 
Finished goods
   
123,080
     
126,079
     
104,356
 
Total inventories
   
273,665
     
287,305
     
232,210
 
Refundable income taxes
   
-
     
2,235
     
-
 
Deferred income taxes
   
6,848
     
6,866
     
9,203
 
Other current assets
   
20,743
     
18,820
     
20,280
 
TOTAL CURRENT ASSETS
   
585,395
     
496,398
     
509,554
 
                         
DEFERRED INCOME TAXES
   
1,312
     
1,365
     
1,696
 
OTHER ASSETS
   
14,915
     
12,087
     
12,615
 
GOODWILL
   
160,146
     
160,146
     
160,146
 
INDEFINITE-LIVED INTANGIBLE ASSETS
   
2,340
     
2,340
     
2,340
 
OTHER INTANGIBLE ASSETS, NET
   
6,339
     
7,241
     
7,815
 
PROPERTY, PLANT AND EQUIPMENT:
                       
Property, plant and equipment
   
599,584
     
578,702
     
578,429
 
Less accumulated depreciation and amortization
   
(354,548
)
   
(341,292
)
   
(339,082
)
PROPERTY, PLANT AND EQUIPMENT, NET
   
245,036
     
237,410
     
239,347
 
TOTAL ASSETS
 
$
1,015,483
   
$
916,987
   
$
933,513
 
                         
LIABILITIES AND SHAREHOLDERS' EQUITY
                       
CURRENT LIABILITIES:
                       
Cash overdraft
 
$
-
   
$
1,079
   
$
-
 
Accounts payable
   
99,008
     
72,918
     
85,520
 
Accrued liabilities:
                       
Compensation and benefits
   
60,069
     
45,018
     
45,651
 
Income taxes
   
15
     
-
     
6,269
 
Other
   
33,849
     
20,084
     
26,900
 
TOTAL CURRENT LIABILITIES
   
192,941
     
139,099
     
164,340
 
                         
LONG-TERM DEBT
   
84,700
     
84,700
     
84,700
 
DEFERRED INCOME TAXES
   
26,896
     
26,788
     
24,861
 
OTHER LIABILITIES
   
15,862
     
16,666
     
16,211
 
TOTAL LIABILITIES
   
320,399
     
267,253
     
290,112
 
                         
SHAREHOLDERS' EQUITY:
                       
Controlling interest shareholders' equity:
                       
Preferred stock, no par value; shares authorized 1,000,000; issued and outstanding, none
 
$
-
   
$
-
   
$
-
 
Common stock, no par value; shares authorized 40,000,000; issued and outstanding, 19,974,886, 19,948,270, and 19,893,513.
   
19,975
     
19,948
     
19,900
 
Additional paid-in capital
   
161,122
     
156,129
     
153,932
 
Retained earnings
   
501,181
     
461,812
     
458,005
 
Accumulated other comprehensive income
   
2,767
     
3,466
     
3,901
 
Employee stock notes receivable
   
(530
)
   
(732
)
   
(732
)
Total controlling interest shareholders' equity
   
684,515
     
640,623
     
635,006
 
Noncontrolling interest
   
10,569
     
9,111
     
8,395
 
TOTAL SHAREHOLDERS' EQUITY
   
695,084
     
649,734
     
643,401
 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
1,015,483
   
$
916,987
   
$
933,513
 

See notes to consolidated condensed financial statements.
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
AND COMPREHENSIVE INCOME
(Unaudited)

(in thousands, except per share data)
               
                 
   
Three Months Ended
   
Nine Months Ended
 
   
September 27,
2014
   
September 28,
2013
   
September 27,
2014
   
September 28,
2013
 
                 
NET SALES
 
$
713,489
   
$
651,780
   
$
2,040,239
   
$
1,944,711
 
                                 
COST OF GOODS SOLD
   
623,903
     
573,491
     
1,787,652
     
1,729,027
 
                                 
GROSS PROFIT
   
89,586
     
78,289
     
252,587
     
215,684
 
                                 
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
   
59,936
     
53,020
     
172,835
     
154,348
 
ANTI-DUMPING DUTY ASSESSMENT
   
-
     
887
     
1,600
     
887
 
NET GAIN ON DISPOSITION AND IMPAIRMENT OF ASSETS
   
(2,570
)
   
(145
)
   
(3,418
)
   
(253
)
                                 
EARNINGS FROM OPERATIONS
   
32,220
     
24,527
     
81,570
     
60,702
 
                                 
INTEREST EXPENSE
   
1,016
     
1,159
     
3,184
     
3,584
 
INTEREST INCOME
   
(346
)
   
(159
)
   
(975
)
   
(463
)
EQUITY IN EARNINGS OF INVESTEE
   
(118
)
   
(18
)
   
(246
)
   
(152
)
     
552
     
982
     
1,963
     
2,969
 
                                 
EARNINGS BEFORE INCOME TAXES
   
31,668
     
23,545
     
79,607
     
57,733
 
                                 
INCOME TAXES
   
11,176
     
8,530
     
29,000
     
20,589
 
                                 
NET EARNINGS
   
20,492
     
15,015
     
50,607
     
37,144
 
                                 
LESS NET EARNINGS ATTRIBUTABLE TO NONCONTROLLING INTEREST
   
(1,258
)
   
(924
)
   
(2,369
)
   
(2,057
)
                                 
NET EARNINGS ATTRIBUTABLE TO CONTROLLING INTEREST
 
$
19,234
   
$
14,091
   
$
48,238
   
$
35,087
 
                                 
EARNINGS PER SHARE - BASIC
 
$
0.96
   
$
0.71
   
$
2.40
   
$
1.76
 
                                 
EARNINGS PER SHARE - DILUTED
 
$
0.96
   
$
0.71
   
$
2.40
   
$
1.76
 
                                 
NET EARNINGS
   
20,492
     
15,015
     
50,607
     
37,144
 
FOREIGN CURRENCY TRANSLATION ADJUSTMENT
   
(491
)
   
752
     
(885
)
   
(316
)
COMPREHENSIVE INCOME
   
20,001
     
15,767
     
49,722
     
36,828
 
LESS COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST
   
(1,317
)
   
(1,106
)
   
(2,183
)
   
(2,098
)
COMPREHENSIVE INCOME ATTRIBUTABLE TO CONTROLLING INTEREST
 
$
18,684
   
$
14,661
   
$
47,539
   
$
34,730
 

See notes to consolidated condensed financial statements.
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)

(in thousands, except share and per share data)          
                             
   
Controlling Interest Shareholders' Equity
         
   
Common
Stock
   
Additional
Paid-In
Capital
   
Retained
Earnings
   
Accumulated
Other
Comprehen-
sive
Earnings
   
Employees
Stock
Notes
Receivable
   
Noncontrolling
Interest
   
Total
 
Balance at December 29, 2012
 
$
19,800
   
$
149,805
   
$
426,887
   
$
4,258
   
$
(982
)
 
$
7,757
   
$
607,525
 
Net earnings
                   
35,087
                     
2,057
     
37,144
 
Foreign currency translation adjustment
                           
(357
)
           
41
     
(316
)
Distributions to noncontrolling interest
                                     
(1,460
)
   
(1,460
)
Cash Dividends - $0.200 per share
                   
(3,977
)
                           
(3,977
)
Issuance of 31,341 shares under employee stock plans
   
31
     
808
                                     
839
 
Issuance of 30,650 shares under stock grant programs
   
31
     
10
     
8
                             
49
 
Issuance of 41,019 shares under deferred compensation plans
   
41
     
(41
)
                                   
-
 
Tax benefits from non-qualified stock options exercised
           
109
                                     
109
 
Expense associated with share-based compensation arrangements
           
1,442
                                     
1,442
 
Accrued expense under deferred compensation plans
           
1,897
                                     
1,897
 
Notes receivable written off
   
(3
)
   
(98
)
                   
105
             
4
 
Payments received on employee stock notes receivable
                                   
145
             
145
 
Balance at September 28, 2013
 
$
19,900
   
$
153,932
   
$
458,005
   
$
3,901
   
$
(732
)
 
$
8,395
   
$
643,401
 
                                                         
Balance at December 28, 2013
 
$
19,948
   
$
156,129
   
$
461,812
   
$
3,466
   
$
(732
)
 
$
9,111
   
$
649,734
 
Net earnings
                   
48,238
                     
2,369
     
50,607
 
Foreign currency translation adjustment
                           
(699
)
           
(186
)
   
(885
)
Noncontrolling interest associated with business acquisitions
                                           
985
     
985
 
Distributions to noncontrolling interest
                                     
(1,710
)
   
(1,710
)
Cash Dividends - $0.210 per share
                   
(4,214
)
                           
(4,214
)
Issuance of 8,681 shares under employee stock plans
   
9
     
297
     
14
                             
320
 
Issuance of 77,736 shares under stock grant programs
   
78
     
1,108
                                     
1,186
 
Issuance of 43,210 shares under deferred compensation plans
   
43
     
(43
)
                                   
-
 
Repurchase of 103,011 shares
   
(103
)
           
(4,669
)
                           
(4,772
)
Tax benefits from non-qualified stock options exercised
                                                   
-
 
Expense associated with share-based compensation arrangements
           
1,445
                                     
1,445
 
Accrued expense under deferred compensation plans
           
2,186
                                     
2,186
 
Payments received on employee stock notes receivable
                                   
202
             
202
 
Balance at September 27, 2014
 
$
19,975
   
$
161,122
   
$
501,181
   
$
2,767
   
$
(530
)
 
$
10,569
   
$
695,084
 

See notes to consolidated condensed financial statements.
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
 

(in thousands)
 
   
Nine Months Ended
 
   
September 27,
2014
   
September 28,
2013
 
CASH FLOWS FROM OPERATING ACTIVITIES:
       
Net earnings
 
$
50,607
   
$
37,144
 
Adjustments to reconcile net earnings attributable to controlling interest:
               
Depreciation
   
24,241
     
22,333
 
Amortization of intangibles
   
1,743
     
1,880
 
Expense associated with share-based compensation arrangements
   
1,445
     
1,491
 
Excess tax benefits from share-based compensation arrangements
   
(2
)
   
(8
)
Expense associated with stock grant plans
   
81
     
-
 
Deferred income taxes (credit)
   
127
     
(83
)
Equity in earnings of investee
   
(246
)
   
(152
)
Net gain on disposition and impairment of assets
   
(3,418
)
   
(195
)
Changes in:
               
Accounts receivable
   
(76,642
)
   
(79,849
)
Inventories
   
14,754
     
11,261
 
Accounts payable and cash overdraft
   
25,078
     
19,336
 
Accrued liabilities and other
   
32,760
     
34,580
 
NET CASH FROM OPERATING ACTIVITIES
   
70,528
     
47,738
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchases of property, plant and equipment
   
(31,676
)
   
(32,108
)
Proceeds from sale of property, plant and equipment
   
6,463
     
1,261
 
Acquisitions, net of cash received
   
(7,135
)
   
(9,296
)
Advances of notes receivable
   
(2,229
)
   
(1,990
)
Collections on notes receivable
   
983
     
1,441
 
Cash restricted as to use
   
-
     
6,111
 
Other, net
   
(95
)
   
28
 
NET CASH FROM INVESTING ACTIVITIES
   
(33,689
)
   
(34,553
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Borrowings under revolving credit facilities
   
192,475
     
251,801
 
Repayments under revolving credit facilities
   
(192,475
)
   
(262,891
)
Debt issuance costs
   
(11
)
   
(15
)
Proceeds from issuance of common stock
   
297
     
839
 
Distributions to noncontrolling interest
   
(1,710
)
   
(1,460
)
Dividends paid to shareholders
   
(4,214
)
   
(3,977
)
Repurchase of common stock
   
(4,772
)
     -  
Excess tax benefits from share-based compensation arrangements
   
2
     
8
 
NET CASH FROM FINANCING ACTIVITIES
   
(10,408
)
   
(15,695
)
                 
Effect of exchange rate changes on cash
   
(247
)
   
14
 
NET CHANGE IN CASH AND CASH EQUIVALENTS
   
26,184
     
(2,496
)
                 
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
 
$
-
   
$
7,647
 
                 
CASH AND CASH EQUIVALENTS, END OF PERIOD
 
$
26,184
   
$
5,151
 
                 
SUPPLEMENTAL INFORMATION:
               
Interest paid
 
$
2,475
   
$
2,850
 
Income taxes paid
   
26,605
     
6,780
 
                 
NON-CASH INVESTING ACTIVITIES
               
Other receivables exchanged for notes receivable
   
2,768
     
1,635
 
Notes receivable exchanged for property
   
2,980
     
3,900
 
                 
NON-CASH FINANCING ACTIVITIES:
               
Common stock issued under deferred compensation plans
   
2,270
     
1,647
 

See notes to consolidated condensed financial statements.
UNIVERSAL FOREST PRODUCTS, INC.

NOTES TO UNAUDITED
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 
A. BASIS OF PRESENTATION

The accompanying unaudited interim consolidated condensed financial statements (the "Financial Statements") include our accounts and those of our wholly-owned and majority-owned subsidiaries and partnerships, and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.  Accordingly, the Financial Statements do not include all of the information and footnotes normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States.  All intercompany transactions and balances have been eliminated.

In our opinion, the Financial Statements contain all material adjustments necessary to present fairly our consolidated financial position, results of operations and cash flows for the interim periods presented.  All such adjustments are of a normal recurring nature.  These Financial Statements should be read in conjunction with the annual consolidated financial statements, and footnotes thereto, included in our Annual Report to Shareholders on Form 10-K for the fiscal year ended December 28, 2013.

Seasonality has a significant impact on our working capital from March to August which historically results in negative or modest cash flows from operations in our first and second quarters. Conversely, we experience a substantial decrease in working capital from September to February which typically results in significant cash flow from operations in our third and fourth quarters.  For comparative purposes, we have included the September 28, 2013 balances in the accompanying unaudited consolidated condensed balance sheets.

B. FAIR VALUE

We apply the provisions of ASC 820, Fair Value Measurements and Disclosures, to assets and liabilities measured at fair value.  Assets measured at fair value are as follows:

   
September 27, 2014
   
September 28, 2013
 
(in thousands)
 
Quoted Prices
in Active
Markets
(Level 1)
   
Quoted Prices
in Active
Markets
(Level 1)
 
         
Money market funds
 
$
651
   
$
62
 
Mutual funds:
               
Domestic stock funds
   
658
     
725
 
International stock funds
   
218
     
535
 
Target funds
   
296
     
159
 
Bond funds
   
156
     
135
 
Total mutual funds
   
1,328
     
1,554
 
     
1,979
     
1,616
 

UNIVERSAL FOREST PRODUCTS, INC.

We maintain money market and mutual funds in our non-qualified deferred compensation plan.  These funds are valued at prices quoted in an active exchange market and are included in “Other Assets”.  We have elected not to apply the fair value option under ASC 825, Financial Instruments, to any of our financial instruments except for those expressly required by U.S. GAAP.

We did not maintain any Level 2 or 3 assets or liabilities at September 27, 2014 or September 28, 2013.

C. REVENUE RECOGNITION

Revenue is recognized at the time the product is shipped to the customer. Generally, title passes at the time of shipment.  In certain circumstances, the customer takes title when the shipment arrives at the destination.  However, our shipping process is typically completed the same day.

Earnings on construction contracts are reflected in operations using percentage-of-completion accounting, under either cost to cost or units of delivery methods, depending on the nature of the business at individual operations.  Under percentage-of-completion using the cost to cost method, revenues and related earnings on construction contracts are measured by the relationships of actual costs incurred related to the total estimated costs.  Under percentage-of-completion using the units of delivery method, revenues and related earnings on construction contracts are measured by the relationships of actual units produced related to the total number of units.  Revisions in earnings estimates on the construction contracts are recorded in the accounting period in which the basis for such revisions becomes known.  Projected losses on individual contracts are charged to operations in their entirety when such losses become apparent.

Our construction contracts are generally entered into with a fixed price and completion of the projects can range from 6 to 18 months in duration.  Therefore, our operating results are impacted by, among many other things, labor rates and commodity costs.  During the year, we update our estimated costs to complete our projects using current labor and commodity costs and recognize losses to the extent that they exist.

The following table presents the balances of percentage-of-completion accounts which are included in “Other current assets” and “Accrued liabilities: Other”, respectively (in thousands):

   
September 27,
2014
   
December 28,
2013
   
September 28,
2013
 
             
Cost and Earnings in Excess of Billings
 
$
6,883
   
$
6,903
   
$
9,640
 
Billings in Excess of Cost and Earnings
   
3,940
     
2,858
     
2,655
 

UNIVERSAL FOREST PRODUCTS, INC.

D. EARNINGS PER SHARE

The computation of earnings per share (“EPS”) is as follows (in thousands):

   
Three Months Ended
   
Nine Months Ended
 
   
September 27,
2014
   
September 28,
2013
   
September 27,
2014
   
September 28,
2013
 
Numerator:
               
Net earnings attributable to controlling interest
 
$
19,234
   
$
14,091
   
$
48,238
   
$
35,087
 
Adjustment for earnings allocated to non-vested restricted common stock
   
(178
)
   
(134
)
   
(444
)
   
(338
)
Net earnings for calculating EPS
 
$
19,056
   
$
13,957
   
$
47,794
   
$
34,749
 
Denominator:
                               
Weighted average shares outstanding
   
20,100
     
19,965
     
20,095
     
19,916
 
Adjustment for non-vested restricted common stock
   
(186
)
   
(190
)
   
(186
)
   
(192
)
Shares for calculating basic EPS
   
19,914
     
19,775
     
19,909
     
19,724
 
Effect of dilutive stock options
   
18
     
25
     
24
     
39
 
Shares for calculating diluted EPS
   
19,932
     
19,800
     
19,933
     
19,763
 
Net earnings per share:
                               
Basic
 
$
0.96
   
$
0.71
   
$
2.40
   
$
1.76
 
Diluted
 
$
0.96
   
$
0.71
   
$
2.40
   
$
1.76
 

No options were excluded from the computation of diluted EPS for the quarters ended September 27, 2014 or September 28, 2013.

E. COMMITMENTS, CONTINGENCIES, AND GUARANTEES

We are self-insured for environmental impairment liability, including certain liabilities which are insured through a wholly owned subsidiary, Ardellis Insurance Ltd., a licensed captive insurance company.

We own and operate a number of facilities throughout the United States that chemically treat lumber products.  In connection with the ownership and operation of these and other real properties, and the disposal or treatment of hazardous or toxic substances, we may, under various federal, state, and local environmental laws, ordinances, and regulations, be potentially liable for removal and remediation costs, as well as other potential costs, damages, and expenses.  Environmental reserves, calculated with no discount rate, have been established to cover remediation activities at our affiliates’ wood preservation facilities in Stockertown, PA; Elizabeth City, NC; Auburndale, FL; and Medley, FL. In addition, a reserve was established for our affiliate’s facility in Thornton, CA to remove certain lead containing materials which existed on the property at the time of purchase.  During 2009, a subsidiary entered into a consent order with the State of Florida to conduct additional testing at the Auburndale, FL facility. We admitted no liability and the costs are not expected to be material.
UNIVERSAL FOREST PRODUCTS, INC.
 
On a consolidated basis, we have reserved approximately $3.2 million on September 27, 2014 and $3.5 million on September 28, 2013, representing the estimated costs to complete future remediation efforts. These amounts are included in Other Liabilities within the condensed balance sheet and have not been reduced by an insurance receivable.

As of September 27, 2014, we have an accrual balance of $2.2 million related to anti-dumping duty assessments imposed on steel nails imported from China.

We are currently undergoing an unclaimed property audit with the state of Michigan covering the period July 1, 1994 to present. We anticipate that the audit will be completed during the fourth quarter of 2014 and do not expect it to result in a material loss.

In addition, on September 27, 2014, we were parties either as plaintiff or defendant to a number of lawsuits and claims arising through the normal course of our business. In the opinion of management, our consolidated financial statements will not be materially affected by the outcome of these contingencies and claims.

On September 27, 2014, we had outstanding purchase commitments on capital projects of approximately $8.5 million.

We provide a variety of warranties for products we manufacture. Historically, warranty claims have not been material.  We distribute products manufactured by other companies, some of which are no longer in business.  While we do not warrant these products, we have received claims as a distributor of these products when the manufacturer no longer exists or has the ability to pay.  Historically, these costs have not had a material affect on our consolidated financial statements.

In certain cases we supply building materials and labor to residential and multi-family construction projects or we jointly bid on contracts with framing companies for such projects. In some instances we are required to post payment and performance bonds to insure the owner that the products and installation services are completed in accordance with our contractual obligations.  We have agreed to indemnify the surety for claims made against the bonds.  As of September 27, 2014 we had approximately $8.7 million in outstanding payment and performance bonds, which expire during the next two years.  In addition, approximately $21.7 million in payment and performance bonds are outstanding for completed projects which are still under warranty.
UNIVERSAL FOREST PRODUCTS, INC.

On September 27, 2014, we had outstanding letters of credit totaling $26.9 million, primarily related to certain insurance contracts and industrial development revenue bonds described further below.

In lieu of cash deposits, we provide irrevocable letters of credit in favor of our insurers to guarantee our performance under certain insurance contracts.  We currently have irrevocable letters of credit outstanding totaling approximately $16.7 million for these types of insurance arrangements.  We have reserves recorded on our balance sheet, in accrued liabilities, that reflect our expected future liabilities under these insurance arrangements.

We are required to provide irrevocable letters of credit in favor of the bond trustees for all of the industrial development revenue bonds that we have issued.  These letters of credit guarantee principal and interest payments to the bondholders.  We currently have irrevocable letters of credit outstanding totaling approximately $9.8 million related to our outstanding industrial development revenue bonds.  These letters of credit have varying terms but may be renewed at the option of the issuing banks.

Certain wholly owned domestic subsidiaries have guaranteed the indebtedness of Universal Forest Products, Inc. in certain debt agreements, including the Series 2012 Senior Notes and our revolving credit facility.  The maximum exposure of these guarantees is limited to the indebtedness outstanding under these debt arrangements and this exposure will expire concurrent with the expiration of the debt agreements.

Many of our wood treating operations utilize "Subpart W" drip pads, defined as hazardous waste management units by the EPA.  The rules regulating drip pads require that the pad be “closed” at the point that it is no longer intended to be used for wood treating operations or to manage hazardous waste.  Closure involves identification and disposal of contaminants which are required to be removed from the facility.  The cost of closure is dependent upon a number of factors including, but not limited to, identification and removal of contaminants, cleanup standards that vary from state to state, and the time period over which the cleanup would be completed.  Based on our present knowledge of existing circumstances, it is considered probable that these costs will approximate $0.6 million.  As a result, this amount is recorded in other long-term liabilities on September 27, 2014.

We did not enter into any new guarantee arrangements during the third quarter of 2014 which would require us to recognize a liability on our balance sheet.

UNIVERSAL FOREST PRODUCTS, INC.

F.
BUSINESS COMBINATIONS

We completed the following acquisitions in fiscal 2014 and 2013 which were accounted for using the purchase method (in thousands):

Company Name
Acquisition Date
Purchase Price
 
Intangible Assets
   
Net Tangible Assets
 
Operating
Segment
Business Description
High Level Components, LLC (“High Level”)
March 31, 2014
$2,944
(asset purchase)
 
$
-
   
$
3,232
 
Eastern Division
A building component manufacturer based in Locust, NC.  High Level had annual sales of $6.8 million.
Upshur Forest Products, LLC (“Upshur”)
March 28, 2014
$1,774
(50% asset purchase; 51% voting majority)
 
$
788
   
$
985
 
Western Division
A sawmill located in Gilmer, TX.  Upshur had annual sales of $8.9 million.
Container Systems, Inc. (“CSI”)
March 14, 2014
$2,417 (asset purchase)
 
$
-
   
$
2,417
 
Eastern Division
A manufacturer of crates and containers for industrial applications and the moving-and-storage industry, located in Franklinton, NC.  CSI had annual sales of $3.0 million.
SE Panel and Lumber Supply, LLC (“SE Panel”)
November 8, 2013
$2,181 (asset purchase)
 
$
-
   
$
2,181
 
Eastern Division
A distributor of Olympic Panel overlay concrete forming panels and commodity lumber products to the concrete forming and construction industries.  Facility is located in South Daytona, FL.  SE Panel had annual sales of $5.4 million.
Premier Laminating Services, Inc.
(“Premier Laminating”)
May 31, 2013
$696 (asset purchase)
 
$
250
   
$
446
 
Western Division
A business specialized in laminated wood products. Facility is located in Perris, CA. Premier Laminating had annual sales of $6.2 million.
Millry Mill Company, Inc. (“Millry”)
February 28, 2013
$2,323 (asset purchase)
 
$
50
   
$
2,273
 
Eastern Division
A specialized export mill that produces rough dimension boards and lumber.  Facility is located in Millry, AL.  Millry had annual sales of $4.7 million.
Custom Caseworks, Inc. (“Custom Caseworks”)
December 31, 2012
$6,278 (asset purchase)
 
$
2,000
   
$
4,278
 
Western Division
A high-precision business-to-business manufacturer of custom casework, cabinetry and other products used in many commercial markets. Facility is located in Sauk Rapids, MN. Custom Caseworks had annual sales of $7 million.

UNIVERSAL FOREST PRODUCTS, INC.

The intangible assets for the acquisitions were finalized and allocated to their respective identifiable intangible asset and goodwill accounts during 2013 and 2014.

G.
SEGMENT REPORTING

ASC 280, Segment Reporting (“ASC 280”), defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.

Our operating segments consist of the Eastern, Western, Site-Built, Consumer Products, Pinelli Universal and Distribution divisions.  In accordance with ASC 280, due to the similar economic characteristics, nature of products, distribution methods, and customers, we have aggregated our Eastern and Western operating segments into one reportable segment.  The Site-Built division is considered a separate reportable segment.  Our other divisions do not collectively form a reportable segment because they do not meet the applicable quantitative requirements.  These operations have been included in the “All Other” column of the table below.  The “Corporate” column includes unallocated administrative costs and certain incentive compensation expense.
   
Three Months Ended September 27, 2014
 
   
 
Eastern and
Western
   
Site-Built
   
All Other
   
Corporate
   
Total
 
Net sales to outside customers
 
$
585,156
   
$
68,326
   
$
60,007
   
$
-
   
$
713,489
 
Intersegment net sales
   
24,884
     
2,238
     
2,303
     
-
     
29,425
 
Segment operating profit
   
23,557
     
6,053
     
2,597
     
13
     
32,220
 

   
Three Months Ended September 28, 2013
 
   
 
Eastern and
Western
   
Site-Built
   
All Other
   
Corporate
   
Total
 
Net sales to outside customers
 
$
523,364
   
$
70,579
   
$
57,837
   
$
-
   
$
651,780
 
Intersegment net sales
   
21,246
     
4,406
     
2,968
     
-
     
28,620
 
Segment operating profit
   
18,628
     
3,993
     
630
     
1,276
     
24,527
 
                                         

   
Nine Months Ended September 27, 2014
 
   
 
Eastern and
Western
   
Site-Built
   
All Other
   
Corporate
   
Total
 
Net sales to outside customers
 
$
1,675,609
   
$
187,968
   
$
176,662
   
$
-
   
$
2,040,239
 
Intersegment net sales
   
73,261
     
8,966
     
11,446
     
-
     
93,673
 
Segment operating profit (loss)
   
67,441
     
13,557
     
3,753
     
(3,181
)
   
81,570
 

UNIVERSAL FOREST PRODUCTS, INC.

   
Nine Months Ended September 28, 2013
 
   
 
Eastern and
Western
   
Site-Built
   
All Other
   
Corporate
   
Total
 
Net sales to outside customers
 
$
1,570,073
   
$
202,590
   
$
172,048
   
$
-
   
$
1,944,711
 
Intersegment net sales
   
69,179
     
13,168
     
9,913
     
-
     
92,260
 
Segment operating profit
   
54,412
     
2,163
     
1,543
     
2,584
     
60,702
 

H.
INCOME TAXES

Effective tax rates differ from statutory federal income tax rates, primarily due to provisions for state and local income taxes and permanent tax differences.  Our effective tax rate was 35.3% in the third quarter of 2014 compared to 36.2% for same period of 2013.  Our effective tax rate was 36.4% in the first nine months of 2014 compared to 35.7% for the same period of 2013.  The increase in our effective tax rate in the first nine months of 2014 was primarily due to research and development and certain other tax credits totaling approximately $500,000 relating to 2012 that were recorded in 2013.  These tax credits were enacted in the first quarter of 2013, retroactive to the beginning of 2012.

I.
NET GAIN ON SALE AND IMPAIRMENT OF ASSETS

During the third quarter of 2014, the net gain on disposition and impairment of assets totaled $2.6 million.  Included within the $2.6 million net gain was a gain on the sale of certain real estate totaling $2.7 million completed by a 50% owned subsidiary of the Company.    After considering the $1.35 million non-controlling interest and income taxes, net earnings attributable to controlling interests increased by approximately $700,000 as a result of these transactions.  In the first nine months of 2014, we recognized a net gain on the sale of assets of $4.6 million, which was offset by a $1.2 million impairment loss recorded to reduce the value of one of our vacant properties.
UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Universal Forest Products, Inc. is a holding company that provides capital, management and administrative resources to subsidiaries that supply wood, wood composite and other products to three primary markets: retail, housing and construction, and industrial. Our retail market is comprised of building materials sold primarily to national home center retailers, retail-oriented regional lumber yards and contractor-oriented lumber yards. Our housing and construction market is comprised of three submarkets, manufactured housing customers, residential construction customers and commercial construction customers. Our industrial market is generally defined as industrial manufacturers and agricultural customers for packaging, material handling and other applications. Founded in 1955, the Company is headquartered in Grand Rapids, Mich., with affiliates throughout North America. For more about Universal Forest Products, go to www.ufpi.com.

This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act, as amended, that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the markets we serve, the economy and the Company itself. Words like “anticipates,” “believes,” “confident,” “estimates,” “expects,” “forecasts,” “likely,” “plans,” “projects,” “should,” variations of such words, and similar expressions identify such forward-looking statements. These statements do not guarantee future performance and involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. The Company does not undertake to update forward-looking statements to reflect facts, circumstances, events, or assumptions that occur after the date the forward-looking statements are made. Actual results could differ materially from those included in such forward-looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainty. Among the factors that could cause actual results to differ materially from forward-looking statements are the following: fluctuations in the price of lumber; adverse or unusual weather conditions; adverse economic conditions in the markets we serve; government regulations, particularly involving environmental and safety regulations; and our ability to make successful business acquisitions. Certain of these risk factors as well as other risk factors and additional information are included in the Company's reports on Form 10-K and 10-Q on file with the Securities and Exchange Commission. We are pleased to present this overview of 2014.

OVERVIEW

Our results for the third quarter of 2014 were impacted by the following:

· Our overall sales increased by 9.5% compared to the third quarter of 2013, comprised of a 4% increase in unit sales and a 6% increase in our selling prices due to the commodity lumber market (See Historical Lumber Prices).  Sales increased in each of our primary markets, relative to the comparative quarter of 2013.

· National housing starts increased approximately 12.6% in the period from June through August 2014 (our sales trail housing starts by about a month), compared to the same period of 2013.  Although national housing starts increased, our unit sales to the residential construction market decreased 10%, primarily due to being more selective in the business that we take, particularly in our framing operations within our Site-Built segment.
UNIVERSAL FOREST PRODUCTS, INC.

· Production of HUD code manufactured homes increased 9% in the third quarter of 2014, compared to the same period of 2013, and production of modular homes was soft.  By comparison, our unit sales increased by only 1% to these customers.  Our growth in unit sales trails the overall market because one of our largest customers in this market recently employed a vertical integration strategy in which it manufactures certain wood components used in its homes.

· One of our 50% owned subsidiaries, which we consolidate, sold certain idle real estate during the quarter and recorded a gain before non-controlling interests and income taxes totaling approximately $2.7 million, resulting in a total net gain on the sale and impairment of assets totaling approximately $2.6 million.  After considering non-controlling interests and income taxes, these transactions contributed approximately $700,000 to net earnings attributable to controlling interests this quarter.
 
HISTORICAL LUMBER PRICES

We experience significant fluctuations in the cost of commodity lumber products from primary producers ("Lumber Market"). The following table presents the Random Lengths framing lumber composite price:

   
Random Lengths Composite
 
   
Average $/MBF
 
   
2014
   
2013
 
         
January
 
$
395
   
$
393
 
February
   
394
     
409
 
March
   
387
     
436
 
April
   
367
     
429
 
May
   
377
     
367
 
June
   
375
     
329
 
July
   
381
     
343
 
August
   
401
     
353
 
September
   
398
     
368
 

Third quarter average
 
$
393
   
$
355
 
Year-to-date average
   
386
     
381
 
                 
Third quarter percentage change
   
10.7
%
       
Year-to-date percentage change
   
1.3
%
       
UNIVERSAL FOREST PRODUCTS, INC.

In addition, a Southern Yellow Pine ("SYP") composite price, which we prepare and use, is presented below.  Sales of products produced using this species, which primarily consists of our preservative-treated products, may comprise approximately 50% of our sales volume.

   
Random Lengths SYP
 
   
Average $/MBF
 
   
2014
   
2013
 
         
January
 
$
375
   
$
397
 
February
   
398
     
426
 
March
   
406
     
445
 
April
   
392
     
436
 
May
   
402
     
383
 
June
   
406
     
355
 
July
   
396
     
366
 
August
   
419
     
364
 
September
   
416
     
360
 

Third quarter average
 
$
410
   
$
363
 
Year-to-date average
   
401
     
392
 
                 
Third quarter percentage change
   
13.0
%
       
Year-to-date percentage change
   
2.3
%
       

IMPACT OF THE LUMBER MARKET ON OUR OPERATING RESULTS

We generally price our products to pass lumber costs through to our customers so that our profitability is based on the value-added manufacturing, distribution, engineering, and other services we provide.  As a result, our sales levels (and working capital requirements) are impacted by the lumber costs of our products.  Lumber costs are a significant percentage of our cost of goods sold.

Our gross margins are impacted by (1) the relative level of the Lumber Market (i.e. whether prices are higher or lower from comparative periods), and (2) the trend in the market price of lumber (i.e. whether the price of lumber is increasing or decreasing within a period or from period to period). Moreover, as explained below, our products are priced differently.  Some of our products have fixed selling prices, while the selling prices of other products are indexed to the reported Lumber Market with a fixed dollar adder to cover conversion costs and profits.  Consequently, the level and trend of the Lumber Market impact our products differently.

UNIVERSAL FOREST PRODUCTS, INC.
 
Below is a general description of the primary ways in which our products are priced.
 
Ÿ Products with fixed selling prices.  These products include value-added products such as deck components and fencing sold to retail building materials customers, as well as trusses, wall panels and other components sold to the residential construction market, and most industrial packaging products.  Prices for these products are generally fixed at the time of the sales quotation for a specified period of time or are based upon a specific quantity.  In order to maintain margins and reduce any exposure to adverse trends in the price of component lumber products, we attempt to lock in costs with our suppliers for these sales commitments.  Also, the time period and quantity limitations generally allow us to re-price our products for changes in lumber costs from our suppliers.

Ÿ Products with selling prices indexed to the reported Lumber Market with a fixed dollar "adder" to cover conversion costs and profits.  These products primarily include treated lumber, remanufactured lumber, and trusses sold to the manufactured housing industry.  For these products, we estimate the customers' needs and we carry anticipated levels of inventory.  Because lumber costs are incurred in advance of final sale prices, subsequent increases or decreases in the market price of lumber impact our gross margins.  For these products, our margins are exposed to changes in the trend of lumber prices.  As a result of the decline in the housing market and our sales to residential and commercial builders, a greater percentage of our sales fall into this general pricing category.  Consequently, we believe our profitability may be impacted to a much greater extent to changes in the trend of lumber prices.

Changes in the trend of lumber prices have their greatest impact on the following products:

Ÿ Products with significant inventory levels with low turnover rates, whose selling prices are indexed to the Lumber Market.  In other words, the longer the period of time these products remain in inventory, the greater the exposure to changes in the price of lumber. This would include treated lumber, which comprises approximately 15% of our total sales.  This exposure is less significant with remanufactured lumber, trusses sold to the manufactured housing market, and other similar products, due to the higher rate of inventory turnover.  We attempt to mitigate the risk associated with treated lumber through vendor consignment inventory programs.  (Please refer to the “Risk Factors” section of our annual report on form 10-K, filed with the United States Securities and Exchange Commission.)

Ÿ Products with fixed selling prices sold under long-term supply arrangements, particularly those involving multi-family construction projects.  We attempt to mitigate this risk through our purchasing practices by locking in costs.
 
In addition to the impact of the Lumber Market trends on gross margins, changes in the level of the market cause fluctuations in gross margins when comparing operating results from period to period. This is explained in the following example, which assumes the price of lumber has increased from period one to period two, with no changes in the trend within each period.
UNIVERSAL FOREST PRODUCTS, INC.
 
   
Period 1
   
Period 2
 
         
Lumber cost
 
$
300
   
$
400
 
Conversion cost
   
50
     
50
 
= Product cost
   
350
     
450
 
Adder
   
50
     
50
 
= Sell price
 
$
400
   
$
500
 
Gross margin
   
12.5
%
   
10.0
%

As is apparent from the preceding example, the level of lumber prices does not impact our overall profits, but does impact our margins.  Gross margins are negatively impacted during periods of high lumber prices; conversely, we experience margin improvement when lumber prices are relatively low.
 
BUSINESS COMBINATIONS

We’ve completed three acquisitions through September 2014, and four during all of 2013.  Each of the acquisitions was accounted for using the purchase method.  The annual revenue of acquisitions completed in 2014 and 2013 totaled $19 million and $23 million, respectively.  These business combinations were not significant to our operating results individually or in aggregate, and thus pro forma results for 2014 and 2013 are not presented.

See Notes to the Unaudited Condensed Consolidated Financial Statements, Note C, "Business Combinations" for additional information.

RESULTS OF OPERATIONS

The following table presents, for the periods indicated, the components of our Unaudited  Condensed Consolidated Statements of Earnings as a percentage of net sales.

   
Three Months Ended
   
Nine months Ended
 
   
September 27,
2014
   
September 28,
2013
    
September 27,
2014
   
September 28,
2013
 
                 
Net sales
   
100.0
%
   
100.0
%
   
100.0
%
   
100.0
%
Cost of goods sold
   
87.4
     
88.0
     
87.6
     
88.9
 
Gross profit
   
12.6
     
12.0
     
12.4
     
11.1
 
Selling, general, and administrative expenses
   
8.4
     
8.1
     
8.5
     
7.9
 
Anti-dumping duty assessments
   
-
     
0.1
     
0.1
     
0.1
 
Net gain on disposition  and impairment of assets
   
(0.4
)
   
-
     
(0.2
)
   
-
 
Earnings from operations
   
4.5
     
3.8
     
4.0
     
3.1
 
Other expense (income), net
   
0.1
     
0.1
     
0.1
     
0.1
 
Earnings before income taxes
   
4.4
     
3.6
     
3.9
     
3.0
 
Income taxes
   
1.6
     
1.3
     
1.4
     
1.1
 
Net earnings
   
2.9
     
2.3
     
2.5
     
1.9
 
Less net earnings attributable to noncontrolling interest
   
(0.2
)
   
(0.1
)
   
(0.1
)
   
(0.1
)
Net earnings attributable to controlling interest
   
2.7
%
   
2.2
%
   
2.4
%
   
1.8
%
 
Note: Actual percentages are calculated and may not sum to total due to rounding.
UNIVERSAL FOREST PRODUCTS, INC.
 
GROSS SALES

We design, manufacture and market wood and wood-alternative products for national home centers and other retailers, structural lumber and other products for the manufactured housing industry, engineered wood components for residential and commercial construction, and specialty wood packaging, components and packing materials for various industries.  Our strategic long-term sales objectives include:

Ÿ Diversifying our end market sales mix by increasing sales of specialty wood packaging to industrial users, increasing our penetration of the commercial market, increasing our sales of engineered wood components for custom home, multi-family, military and light commercial construction, and increasing our market share with independent retailers.

Ÿ Expanding geographically in our core businesses, domestically and internationally.

Ÿ Increasing sales of “value-added” products, which primarily consist of fencing, decking, lattice, and other specialty products sold to the retail building materials market, specialty wood packaging, engineered wood components, and “wood alternative” products. Engineered wood components include roof trusses, wall panels, and floor systems.  Wood alternative products consist primarily of composite wood and plastics. Although we consider the treatment of dimensional lumber with certain chemical preservatives a value-added process, treated lumber is not presently included in the value-added sales totals.

Ÿ Developing new products and expanding our product offering for existing customers.  New product sales were $36.1 million in the third quarter of 2014 compared to $25.9 million during the third quarter of 2013.  New product sales year-to-date for 2014 and 2013 were $110.2 and $74.1 million, respectively.

Ÿ Maximizing unit sales growth while achieving return on investment goals.
UNIVERSAL FOREST PRODUCTS, INC.
 
The following table presents, for the periods indicated, our gross sales and percentage change in gross sales by market classification.

(in thousands)
 
Three Months Ended
    
Nine Months Ended
 
Market Classification
 
September 27,
2014
   
September 28,
2013
   
% Change
   
September 27,
2014
   
September 28,
2013
   
% Change
 
Retail Building Materials
 
$
272,469
   
$
247,182
     
10.2
   
$
823,861
   
$
768,174
     
7.2
 
Industrial
   
211,344
     
186,385
     
13.4
     
585,211
     
539,213
     
8.5
 
Housing and Construction:
                                               
Manufactured Housing
   
104,091
     
100,502
     
3.6
     
287,730
     
301,052
     
(4.4
)
Residential
   
92,829
     
94,893
     
(2.2
)
   
264,370
     
276,335
     
(4.3
)
Commercial
   
42,892
     
31,698
     
35.3
     
108,862
     
86,408
     
26.0
 
Subtotal
   
239,812
        
227,093
     
5.6
     
660,962
     
663,795
     
(0.4
)
Total Gross Sales
   
723,625
     
660,660
     
9.5
     
2,070,034
     
1,971,182
     
5.0
 
Sales Allowances
   
(10,136
)
   
(8,880
)
           
(29,795
)
   
(26,471
)
       
Total Net Sales
 
$
713,489
   
$
651,780
     
9.5
   
$
2,040,239
   
$
1,944,711
     
4.9
 

Note: During 2014, certain customers were reclassified to a different market.  Prior year information has been restated to reflect these changes.

Gross sales in the third quarter of 2014 increased 9.5% compared to the same period of 2013, due to a 4% increase in unit sales and a 6% increase in selling prices.

Gross sales in the first nine months of 2014 increased 5.0% compared to the same period of 2013, due to a 5% increase in unit sales.

Changes in our gross sales by market are discussed below.

Retail Building Materials:

Gross sales to the retail building materials market increased approximately 10% in the third quarter of 2014 compared to the same period of 2013, due to a 5% increase in overall unit sales and a 5% increase in our selling prices due to the Lumber Market.  Within this market, sales to our big box customers increased nearly 8% while our sales to other retailers increased approximately 14%, primarily due to an improvement in consumer demand.  Our big box customers have also reported year over year increases in their same store sales.

Gross sales to the retail building materials market increased 7% in the first nine months of 2014 compared to the same period of 2013, due to an 8% increase in unit sales,  offset by a 1% decrease in selling prices.  Within this market, sales to our big box customers increased 10% while our sales to other retailers increased by 4%.
 
Industrial:

Gross sales to the industrial market increased approximately 13% in the third quarter of 2014 compared to the same period of 2013, resulting from a 7% increase in unit sales and a 6% increase in selling prices due to the Lumber Market. Our growth was due to a combination of new customers and an increase in demand from existing customers.
UNIVERSAL FOREST PRODUCTS, INC.
 
Gross sales to the industrial market increased 9% in the first nine months of 2014 compared to the same period of 2013, due to a 9% increase in unit sales.

Housing and Construction:

Manufactured Housing:  Gross sales to the manufactured housing market increased approximately 4% in the third quarter of 2014 compared to 2013.  The increase was due to a 1% increase in unit sales along with a 3% increase in selling prices.  By comparison, production of HUD-code homes in July and August 2014 were up 9% compared to 2013 but modular home production continued to be soft.  Our unit sales growth continues to trail industry production growth because one of our largest customers in this market recently employed a vertical integration strategy in which it manufactures certain wood components used in its homes.

Gross sales to the manufactured housing market decreased over 4% in the first nine months of 2014 compared to 2013, primarily due to a decrease in selling prices for the first nine months of 2014, while our unit sales remained flat due to the reasons noted above.

Residential Construction:  Gross sales to the residential construction market decreased approximately 2% in the third quarter of 2014 compared to the same period of 2013, due to a 10% decrease in our unit sales, offset by an 8% increase in selling prices.   By comparison, national housing starts increased approximately 12.6% in the period from June through August 2014 (our sales trail housing starts by about a month), compared to the same period of 2013.  The decrease in our unit sales and increase in our selling prices reflects efforts to be more selective in the business that we take, particularly in our framing operations within our Site-Built segment.

Gross sales to the residential construction market decreased over 4% in the first nine months of 2014 compared to the same period of 2013, primarily due to the same factors discussed above.  Our unit sales decreased 10% for the first nine months of 2014.

Commercial Construction:  Gross sales to the commercial construction and concrete forming market increased approximately 35% in the third quarter of 2014 compared to the same period of 2013, due to a 25% increase in unit sales combined with a 10% increase in selling prices.  Our unit sales increase is due to an increase in commercial construction activity and our efforts to capture additional share of certain segments of this market.

Gross sales to the commercial construction market increased 26% in the first nine months of 2014 compared to the same period of 2013, primarily due to an increase in unit sales, as selling prices remained stable in the first nine months of 2014.
UNIVERSAL FOREST PRODUCTS, INC.

Value-Added and Commodity-Based Sales:

The following table presents, for the periods indicated, our percentage of value-added and commodity-based sales to total sales.  Value-added products generally carry higher gross margins than our commodity-based products.
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 27,
2014
   
September 28,
2013
   
September 27,
2014
   
September 28,
2013
 
                 
Value-Added
   
58.3
%
   
59.1
%
   
58.5
%
   
58.1
%
Commodity-Based
   
41.7
%
   
40.9
%
   
41.5
%
   
41.9
%

COST OF GOODS SOLD AND GROSS PROFIT

Our gross profit percentage increased to 12.6% from 12.0% comparing the third quarter of 2014 to the same period of 2013.  Our gross profit dollars increased by 14.4%, which compares favorably with our 4% increase in unit sales.  The improvement in our profitability in the third quarter of 2014 is attributable to the following factors:

· Over $4.5 million of our improvement reflects our efforts to be more selective in the business that we take on sales to the residential construction market, particularly in our framing operations, as well as operational improvements.
· $3.5 million of our gross profit increase is attributable to our growth in sales to the Retail Building Materials market along with a slight margin improvement due to a more favorable trend in commodity lumber prices.
· Our growth in sales to the industrial market contributed $2.7 million to our gross profit increase.
· Our growth in sales to the commercial market added approximately $2.0 million to our gross profits.

Our gross profit percentage increased to 12.4% from 11.1% comparing the first nine months of 2014 to the same period of 2013.  Our gross profit dollars increased by 17.1%, which compares favorably to our 5% increase in unit sales. This improvement is primarily due to the same factors discussed above.  These improvements were offset to some extent by adverse cost variances resulting from a decline in productivity due to inclement weather during the first quarter of 2014.
 
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative ("SG&A") expenses increased by approximately $6.9 million, or 13%, in the third quarter of 2014 compared to the same period of 2013, while we reported a 4% increase in unit sales.  The increase in SG&A was primarily due to a $2.9 million increase in compensation and benefit costs as a result of having more personnel and a $3.2 million increase in incentive compensation resulting from an improvement in our profitability.
UNIVERSAL FOREST PRODUCTS, INC.
 
Selling, general and administrative ("SG&A") expenses increased by approximately $18.5 million, or 12.0%, in the first nine months of 2014 compared to the same period of 2013, while we reported a 5% increase in unit sales.  SG&A expenses were impacted in the first nine months of 2014 by the same factors discussed above.

NET GAIN ON DISPOSITION AND IMPAIRMENT OF ASSETS

During the third quarter of 2014, the net gain on disposition and impairment of assets totaled $2.6 million.  Included within the $2.6 million net gain was a gain on the sale of certain real estate totaling $2.7 million completed by a 50% owned subsidiary of the Company.    After considering the $1.35 million non-controlling interest and income taxes, net earnings attributable to controlling interests increased by approximately $700,000 as a result of these transactions.  In the first nine months of 2014, we recognized a net gain on the sale of assets of $4.6 million, which was offset by a $1.2 million impairment loss recorded to reduce the value of one of our vacant properties.
 
INTEREST, NET

Net interest costs were lower in the third quarter and first nine months of 2014 compared to the same period of 2013, due to lower interest expense resulting from lower debt levels in 2014, as well as an increase in interest income resulting from certain notes receivables.

INCOME TAXES

Effective tax rates differ from statutory federal income tax rates, primarily due to provisions for state and local income taxes and permanent tax differences.  Our effective tax rate was 35.3% in the third quarter of 2014 compared to 36.2% for same period of 2013.  Our effective tax rate was 36.4% in the first nine months of 2014 compared to 35.7% for the same period of 2013.  The increase in our effective tax rate in the first nine months of 2014 was primarily due to research and development and certain other tax credits totaling approximately $500,000 relating to 2012 that were recorded in 2013.  These tax credits were enacted in the first quarter of 2013, retroactive to the beginning of 2012.

SEGMENT REPORTING

The following table presents, for the periods indicated, our net sales and earnings from operations by reportable segment.
 
       
Net Sales
       
Segment Operating Profit
 
(in thousands)
     
Three Months Ended
       
Three Months Ended
 
   
September 27,
2014
   
September 28,
2013
   
$ Change
   
% Change
   
September 27,
2014
   
September 28,
2013
   
$ Change
   
% Change
 
Eastern and Western
 
$
585,156
   
$
523,364
   
$
61,792
     
11.8
%
 
$
23,557
   
$
18,628
   
$
4,929
     
26.5
%
Site-Built
   
68,326
     
70,579
     
(2,253
)
   
(3.2
)
   
6,053
     
3,993
     
2,060
     
51.6
 
All Other
   
60,007
     
57,837
     
2,170
     
3.8
     
2,597
     
630
     
1,967
     
312.2
 
Corporate1
   
-
     
-
     
-
     
-
     
13
     
1,276
     
(1,263
)
   
(99.0
)
Total
 
$
713,489
   
$
651,780
   
$
61,709
     
9.5
%
 
$
32,220
   
$
24,527
   
$
7,693
     
31.4
%
 
UNIVERSAL FOREST PRODUCTS, INC.
 
       
Net Sales
       
Segment Operating Profit
 
(in thousands)
     
Nine Months Ended
       
Nine Months Ended
 
   
September 27,
2014
   
September 28,
2013
   
$ Change
   
% Change
   
September 27,
2014
   
September 28,
2013
   
$ Change
   
% Change
 
Eastern and Western
 
$
1,675,609
   
$
1,570,073
   
$
105,536
     
6.7
%
 
$
67,441
   
$
54,412
   
$
13,029
     
24.0
%
Site-Built
   
187,968
     
202,590
     
(14,622
)
   
(7.2
)
   
13,557
     
2,163
     
11,394
     
526.8
 
All Other
   
176,662
     
172,048
     
4,614
     
2.7
     
3,753
     
1,543
     
2,210
     
143.2
 
Corporate1
   
-
     
-
     
-
     
-
     
(3,181
)
   
2,584
     
(5,765
)
   
(223.1
)
Total
 
$
2,040,239
   
$
1,944,711
   
$
95,528
     
4.9
%
 
$
81,570
   
$
60,702
   
$
20,868
     
34.4
%

1Corporate primarily represents over (under) allocated administrative costs.

Eastern and Western

Net sales for the Eastern and Western reportable segment increased in the third quarter and first nine months of 2014 compared to 2013 primarily due to an increase in sales to retail, industrial, and commercial customers.

Earnings from operations for the Eastern and Western reportable segment increased in the third quarter and first nine months of 2014 compared to 2013, primarily due to an increase in overall unit sales and improvement in product mix.  Unfavorable cost variances in the first quarter of 2014 offset the impact these positive factors had on year to date results.

Site-Built

Net sales for the Site-Built reportable segment decreased in the third quarter and first nine months of 2014 compared to 2013, primarily due to being more selective in the business that we pursued, particularly in our framing operations.  This strategy also contributed to the increase in our profitability in the third quarter and first nine months of 2014.
 
All Other

Net sales for all other segments increased in the third quarter and first nine months of 2014 compared to 2013, primarily due to modest sales increases by our Universal Consumer Products and Distribution operations.
UNIVERSAL FOREST PRODUCTS, INC.
 
Earnings from operations for all other segments increased in the third quarter and first nine months of 2014 compared to 2013, primarily due to our Pinelli Universal operations which improved primarily due to increases in demand and selling prices relative to commodity lumber costs.

OFF-BALANCE SHEET TRANSACTIONS

We have no significant off-balance sheet transactions other than operating leases.

LIQUIDITY AND CAPITAL RESOURCES

The table below presents, for the periods indicated, a summary of our cash flow statement (in thousands):
 
   
Nine Months Ended
 
   
September 27, 2014
   
September 28, 2013
 
Cash from operating activities
 
$
70,528
   
$
47,738
 
Cash from investing activities
   
(33,689
)
   
(34,553
)
Cash from financing activities
   
(10,408
)
   
(15,695
)
Effect of exchange rate changes on cash
   
(247
)
   
14
 
Net change in cash and cash equivalents
   
26,184
     
(2,496
)
Cash and cash equivalents, beginning of period
   
-
     
7,647
 
Cash and cash equivalents, end of period
 
$
26,184
   
$
5,151
 

In general, we financed our growth in the past through a combination of operating cash flows, our revolving credit facility, industrial development bonds (when circumstances permit), and issuance of long-term notes payable at times when interest rates are favorable.  We have not issued equity to finance growth except in the case of a large acquisition.  We manage our capital structure by attempting to maintain a targeted ratio of debt to equity and debt to earnings before interest, taxes, depreciation and amortization.  We believe this is one of many important factors to maintaining a strong credit profile, which in turn helps ensure timely access to capital when needed.

Seasonality has a significant impact on our working capital from March to August which historically results in negative or modest cash flows from operations in our first and second quarters. Conversely, we experience a substantial decrease in working capital from September to February which typically results in significant cash flow from operations in our third and fourth quarters.
 
Due to the seasonality of our business and the effects of the Lumber Market, we believe our cash cycle (days of sales outstanding plus days supply of inventory less days payables outstanding) is a good indicator of our working capital management. Our cash cycle remained consistent in the first nine months of 2014 compared to 2013, which increased slightly to 49 days from 48 days. During the first quarter of 2014, inclement weather resulted in weaker than expected unit sales and lower inventory turnover. In addition, we carried higher levels of safety stock inventory in 2014 due to industry transportation challenges.
UNIVERSAL FOREST PRODUCTS, INC.
Cash from operating activities was $70.5 million in the first nine months of 2014, which was comprised of net earnings of $50.6 million and $24.0 million of non-cash expenses, offset by a $4 million increase in working capital since the end of 2013 due to the seasonality of our business.

Purchases of property, plants, and equipment comprised most of our cash used in investing activities during the first nine months of 2014 and totaled $31.7 million.  We currently plan to spend up to $40 million in 2014.  Outstanding purchase commitments on existing capital projects totaled approximately $8.5 million on September 27, 2014.  We intend to fund capital expenditures and purchase commitments through our operating cash flows for the balance of the year.  Cash flows used in investing activities also included $7.1 million used for acquisitions in the first nine months of 2014. See Notes to Unaudited Consolidated Condensed Financial Statements, Note F “Business Combinations”.  Finally, we sold certain property, plants, and equipment during the first nine months of 2014 and collected cash proceeds totaling $6.5 million.  We recognized a net gain on the sale of these assets totaling $3.4 million.

Cash flows from financing activities primarily consisted of dividends paid in June totaling $0.21 per share, and repurchases of our common stock completed in the third quarter of 2014 totaling almost $4.8 million.  We purchased approximately 103,000 shares and have remaining authorization under our share repurchase program for approximately 2.9 million shares.

On September 27, 2014, we had no outstanding balance on our $265 million revolving credit facility. The revolving credit facility also supports letters of credit totaling approximately $9.8 million on September 27, 2014.  Financial covenants on the unsecured revolving credit facility and unsecured notes include minimum interest tests and a maximum leverage ratio. The agreements also restrict the amount of additional indebtedness we may incur and the amount of assets which may be sold.  We were in compliance with all our covenant requirements on September 27, 2014.

ENVIRONMENTAL CONSIDERATIONS AND REGULATIONS

See Notes to Unaudited Consolidated Condensed Financial Statements, Note E, "Commitments, Contingencies, and Guarantees."
UNIVERSAL FOREST PRODUCTS, INC.

CRITICAL ACCOUNTING POLICIES

In preparing our consolidated financial statements, we follow accounting principles generally accepted in the United States.  These principles require us to make certain estimates and apply judgments that affect our financial position and results of operations. We continually review our accounting policies and financial information disclosures.  There have been no material changes in our policies or estimates since December 28, 2013.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk.

We are exposed to market risks related to fluctuations in interest rates on our variable rate debt, which consists of a revolving credit facility and industrial development revenue bonds.  We do not currently use interest rate swaps, futures contracts or options on futures, or other types of derivative financial instruments to mitigate this risk.

For fixed rate debt, changes in interest rates generally affect the fair market value, but not earnings or cash flows.  Conversely, for variable rate debt, changes in interest rates generally do not influence fair market value, but do affect future earnings and cash flows.  We do not have an obligation to prepay fixed rate debt prior to maturity, and as a result, interest rate risk and changes in fair market value should not have a significant impact on such debt until we would be required to refinance it.

We are subject to fluctuations in the price of lumber.  We experience significant fluctuations in the cost of commodity lumber products from primary producers (the "Lumber Market").  A variety of factors over which we have no control, including government regulations, transportation, environmental regulations, weather conditions, economic conditions, and natural disasters, impact the cost of lumber products and our selling prices.  While we attempt to minimize our risk from severe price fluctuations, substantial, prolonged trends in lumber prices can affect our sales volume, our gross margins, and our profitability.  We anticipate that these fluctuations will continue in the future.  (See “Impact of the Lumber Market on Our Operating Results.”)

Item 4.  Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures.  With the participation of management, our chief executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a – 15e and 15d – 15e) as of the quarter ended September 27, 2014 (the “Evaluation Date”), have concluded that, as of such date, our disclosure controls and procedures were effective.

(b) Changes in Internal Controls.  During the quarter ended September 27, 2014, there were no changes in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
UNIVERSAL FOREST PRODUCTS, INC.

PART II.  OTHER INFORMATION

Item 1A.  Risk Factors.

None.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

(a)
None.

(b)
None.

(c)
Issuer purchases of equity securities.

Fiscal Month
 
(a)
   
(b)
   
(c)
   
(d)
 
                 
June 29 – August 2, 2014(1)
   
7,579
   
$
44.97
     
7,579
     
2,980,650
 
August 3 – August 30, 2014
   
30,939
   
$
45.85
     
30,939
     
2,949,711
 
August 31 – September 27, 2014
   
64,493
   
$
46.81
     
64,493
     
2,885,218
 
                                                                                                
 
(a)
Total number of shares purchased.
 
(b)
Average price paid per share.
 
(c)
Total number of shares purchased as part of publicly announced plans or programs.
 
(d)
Maximum number of shares that may yet be purchased under the plans or programs.
 
 
(1)
On November 14, 2001, the Board of Directors approved a share repurchase program (which succeeded a previous program) allowing us to repurchase up to 2.5 million shares of our common stock.  On October 14, 2011, our Board authorized an additional 2 million shares to be repurchased under our share repurchase program.  The total number of shares that may be repurchased under the program is approximately 3 million shares.

Item 5.  Other Information.

None.
UNIVERSAL FOREST PRODUCTS, INC.

PART II.  OTHER INFORMATION

Item 6.  Exhibits.
 
The following exhibits (listed by number corresponding to the Exhibit Table as Item 601 in Regulation S-K) are filed with this report:
 
31
Certifications.
     
 
(a)
Certificate of the Chief Executive Officer of Universal Forest Products, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
     
 
(b)
Certificate of the Chief Financial Officer of Universal Forest Products, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
     
32
Certifications.
     
 
(a)
Certificate of the Chief Executive Officer of Universal Forest Products, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
     
 
(b)
Certificate of the Chief Financial Officer of Universal Forest Products, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
     
101
Interactive Data File.
     
 
(INS)
XBRL Instance Document.
     
 
(SCH)
XBRL Schema Document.
     
 
(CAL)
XBRL Taxonomy Extension Calculation Linkbase Document.
     
 
(LAB)
XBRL Taxonomy Extension Label Linkbase Document.
     
 
(PRE)
XBRL Taxonomy Extension Presentation Linkbase Document.
     
 
(DEF)
XBRL Taxonomy Extension Definition Linkbase Document.
 

 
*
Indicates a compensatory arrangement.
UNIVERSAL FOREST PRODUCTS, INC.

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
UNIVERSAL FOREST PRODUCTS, INC.
     
Date: October 29, 2014
By:
/s/ Matthew J. Missad
 
Matthew J. Missad,
 
Chief Executive Officer and Principal Executive Officer
     
Date: October 29, 2014
By:
/s/ Michael R. Cole
 
Michael R. Cole,
 
Chief Financial Officer,
 
Principal Financial Officer and
 
Principal Accounting Officer
EXHIBIT INDEX
 
Exhibit No.     
Description
     
31
Certifications.
       
   
Certificate of the Chief Executive Officer of Universal Forest Products, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
       
   
Certificate of the Chief Financial Officer of Universal Forest Products, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
       
32
Certifications.
       
   
Certificate of the Chief Executive Officer of Universal Forest Products, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
       
   
Certificate of the Chief Financial Officer of Universal Forest Products, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
     
101
Interactive Data File.
     
 
(INS)
XBRL Instance Document.
     
 
(SCH)
XBRL Schema Document.
     
 
(CAL)
XBRL Taxonomy Extension Calculation Linkbase Document.
     
 
(LAB)
XBRL Taxonomy Extension Label Linkbase Document.
     
 
(PRE)
XBRL Taxonomy Extension Presentation Linkbase Document.
     
 
(DEF)
XBRL Taxonomy Extension Definition Linkbase Document
 

 
*
Indicates a compensatory arrangement.
 
 
32